Morningstar® Commodities Research

In-Depth Reports

California refiners are under siege. Making gasoline in the Golden State is like smoking. Everyone knows
it’s bad and ought to be banned, but until motorists kick the driving habit or switch to alternative fuels,
refining needs to be restricted to minimize its impact on health and the climate. As a result, the 12
transport fuel refineries left in California struggle under a growing fog of state regulation, making it
difficult to expand their business or even modernize their plants. Despite these constraints, refiners
operate among the most sophisticated fleet of refineries in the world and produce high-specification
fuels from a slate of heavy crude. They are rewarded with robust refining margins today but face a
future with shrinking market share.

To read the rest of the Executive Summary and Key Takeaways for this report Click Here.

If you are interested in obtaining the full report, you may purchase it here.

According to U.S. Energy Information Administration data, the 26 refineries in the Midwest PADD 2 region
processed an average 3.6 million barrels/day, or mmb/d, of crude oil in 2016—up 300 thousand barrels/day, or mb/d, from 3.3
mmb/d in 2010. Over the same six-year period, local light shale production in the region shot up by over 1 mmb/d—mostly from
the prolific Bakken formation in North Dakota. Yet Midwest refiners did little to take advantage of the sudden abundance of
local production. Instead, increasing their appetite for imported heavy crude from Canada by nearly 1 mmb/d from 0.8 mmb/d in 2010 to 1.8 mmb/d in 2016.

To read the rest of the Executive Summary and Key Takeaways for this report Click Here.

If you are interested in obtaining the full report, you may purchase it here.

Three transmission owner transmission solution, or TOTS, projects were completed in June 2016 to reduce the impact of the Indian Point
retirement in April 2020 (Unit 2) and April 2021 (Unit 3) by adding 575 megawatts of transfer capability to the upstate New York to ConEd interface. The added transfer capability combined
with the addition of CPV Valley 775 MW in Zone G (Millennium gas) set to come on line in 2018 and Cricket Valley Energy Center 1,000 MW in Zone F (Iroquois gas), will help fill the supply
gap and solve the bulk NYISO power system. But we still believe that upside risk from congestion, especially from zones F to G, is likely to show up in a post-Indian Point world and that
the market is probably underestimating the impact in 2020 and 2021. This would force more-expensive downstate Zone J generators to be on margin more often. From 2019 to 2020, the current
forward market is only pricing in a $1.40/MW increase in Zone G on-peak spark spreads versus Iroquois gas and less than $0.60/MW of contango in fixed-price Zone G. Zone J should see similar
upside from the retirement of Indian Point but could separate further from Zone G in
winter if oil prices continue to rally.

To read the rest of the Executive Summary and Key Takeaways for this report Click Here.

If you are interested in obtaining the full report, you may purchase it here.

The five refineries in the U.S. Pacific Northwest performed better in 2016 than rivals on the East or Gulf
coasts for two main reasons. First, the changing pattern of North American crude supply has worked to their advantage.
Faced with the threat of dwindling mainstay crude supplies from Alaska, refiners in Washington state replaced 22% of their
slate with North Dakota Bakken crude shipped in by rail. They have also enjoyed advantaged access to discounted crude
supplies from western Canada. Second, Northwest refiners face less competition for refined product customers than rivals on
the East and Gulf coasts, meaning they have a captive market that often translates to higher margins.

To read the rest of the Executive Summary and Key Takeaways for this report Click Here.

If you are interested in obtaining the full report, you may purchase it here.

About Morningstar® Commodities Research™

Morningstar Commodities Research provides independent, fundamental research differentiated by a consistent focus on the competitive dynamics in worldwide commodities markets. This joint effort between Morningstar's Research and Commodities & Energy groups leverages the expertise of Morningstar's 23 energy, utilities, basic materials, and commodities analysts as well as Morningstar's extensive data platform. Morningstar Commodities Research initially will focus on North American power and natural gas markets with plans to expand coverage of other markets worldwide.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individuals, financial advisors, and institutions. Morningstar's Commodities & Energy group provides superior quality market data and analytical products for energy data management systems, financial and agricultural data management, historical analysis, trading, risk management, and forecasting.